According to a note by Eurizon SLJ Asset Management, central banks’ holdings of U.S. dollar-denominated reserves have fallen to less than half of total global reserves. The note states that recent sanctions imposed by the United States against the Bank of Russia have undermined confidence in the dollar as a reserve currency.
Central bank dollar reserves at 47%, eroding confidence in the currency
Central banks are beginning to diversify their foreign exchange reserves away from the dollar, a note issued by Eurizon SLJ Asset Management on April 17reveals that the percentage of reserves held by central banks in dollars will reach 47% during 2022, a sharp decline from 2021, when dollars accounted for 55% of reserves. The report revealedthat the percentage of reserves held in dollars has been declining
Our analysts explained that this decline in just one year is “exceptional” and represents an acceleration in the predicted erosion rate of the US dollar.
They attribute the cause to the broad sanctions applied by the U.S. government against Russia due to its involvement in the current Russian-Ukrainian conflict, the freezing of its overseas gold and foreign currency assets, and the placing of several major companies on the Office of Foreign Assets Control (OFAC) list of designated companies.
The note explains that these “exceptional actions” have made other countries more reluctant to hold foreign currency reserves in the form of US dollars.
The dollar became “toxic”
The trend toward de-dollarization through the so-called “weaponization of sanctions” by the U.S. government has global blocs such as the BRICS and ASEAN seeking alternative ways to trade safely.
The BRICS are currently considering the creation of a common currency, which will be discussed at the next BRICS summit in South Africa. Similarly, ASEAN countries are seeking to reduce their dependence on the dollar and use their own currencies for international settlements, fearing the application of secondary sanctions.
On April 19, Russian Foreign Ministry Deputy Minister Aleksandr Pankin criticized this “weaponization” and noted that a growing number of countries are reducing their foreign reserves and increasing their gold holdings. He said,:
These trends show that the U.S. dollar is big, strong, but still detrimental to daily operations. It is not mainstream, but it has the potential to become a trend.
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